NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Overview and Basis of Presentation
Overview
Biostage,
Inc. (Biostage or the Company) is a clinical-stage biotechnology company developing bioengineered organ implants
based on the Company’s novel CellspanTM technology. The Company’s Cellspan technology is comprised of
a biocompatible scaffold that is seeded with the recipient’s own stem cells. The Company believes that this technology
may prove to be effective for treating patients across a number of life-threatening medical indications who currently have
unmet medical needs. The Company is currently developing its Cellspan technology to treat life-threatening conditions of the
esophagus, bronchus and trachea with the objective of dramatically improving the treatment paradigm for those patients. Since
inception, the Company has devoted substantially all of its efforts to business planning, research and development,
recruiting management and technical staff, and acquiring operating assets. The Company has one business segment and does not
have significant costs or assets outside the United States.
On
October 31, 2013, Harvard Bioscience, Inc. (Harvard Bioscience) contributed its regenerative medicine business assets, plus
$15 million of cash, into Biostage (formerly “Harvard Apparatus Regenerative Technologies”) in a spin-off transaction.
On November 1, 2013, the spin-off of the Company from Harvard Bioscience was completed. On that date, the Company became an independent
company that operates the regenerative medicine business previously owned by Harvard Bioscience. The spin-off was completed through
the distribution of all the shares of common stock of Biostage to stockholders of Harvard Bioscience (the “HBIO Distribution”).
The
Company’s common stock is currently traded on the OTCQB Venture Market under the symbol “BSTG”.
Basis of Presentation
The
consolidated financial statements reflect the Company’s financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States (GAAP).
Use of Estimates
The
preparation of the Company’s consolidated financial statements requires the Company to make estimates, judgments and assumptions
that may affect the reported amounts of assets, liabilities, equity, expenses and related disclosures. On an ongoing basis the
Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various
other assumptions that the Company believes are reasonable, the results of which form the basis for making judgments about the
carrying values of assets, liabilities and equity and the amount of expenses. Actual results may differ from these estimates.
Going Concern
The
Company has incurred substantial operating losses since its inception, and future losses are anticipated. As of June 30,
2020, the Company has an accumulated deficit of approximately $67.3 million and will require additional financing to fund future
operations. The Company expects that its operating cash on-hand at June 30, 2020 of $0.6 million, along with net proceeds received
subsequent to the end of the quarter of approximately $0.2 million from the issuance of 58,932 shares of its common stock from
the exercise of 58,932 previously issued warrants at $3.70 per share will enable it to fund its operating expenses and capital
expenditure requirements into the fourth quarter of 2020. In addition, on January 30, 2020 the World Health Organization declared
the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it a pandemic.
The full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial
condition, expenses, clinical trial, research and development costs and employee-related amounts, will depend on future developments
that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to
contain it or treat COVID-19, as well as the economic impact that may impact the Company. Therefore, these conditions have caused
management to determine there is substantial doubt about the Company’s ability to continue as a going concern.
The
Company will need to raise additional funds to fund its operations. In the event the Company does not raise additional capital
from outside sources before the fourth quarter of 2020, it may be forced to curtail or cease its operations. Cash requirements
and cash resource needs will vary significantly depending upon the timing of the financial and other resource needs that will be
required to complete ongoing pre-clinical and clinical testing of products, research and development, and regulatory efforts and
collaborative arrangements necessary for the Company’s products that are currently under development. In addition, the Company
received $404,221 of loan proceeds in May 2020 as part of the Paycheck Protection Program (PPP), established as part of the Coronavirus
Aid, Relief, and Economic Security (CARES) Act. Based on the current loan terms, payments begin in November 2020 subject to the
Company meeting the partial or full loan forgiveness requirements. See Note 4. The Company is currently seeking and will continue
to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private
equity offerings. The Company may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations
and licensing arrangements. The Company may not be able to obtain additional financing on favorable terms, if at all.
The
Company’s operations will be adversely affected if it is unable to raise or obtain needed funding and such circumstance
may materially affect the Company’s ability to continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern and therefore, the consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amount and classifications of liabilities that may result from the outcome of this uncertainty.
Net Loss Per Share
Basic net loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average
number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common
stock, including the assumed exercise of stock options, warrants, and the impact of unvested restricted stock.
The
Company applies the two-class method to calculate basic and diluted net loss per share attributable to common stockholders
as its warrants to purchase common stock are participating securities.
The
two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise
would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common
stock as the Company has been in a net loss position and the warrant holders do not participate in losses.
Basic and diluted shares outstanding are the same for each period
presented as all common stock equivalents would be antidilutive due to the net losses incurred.
Unaudited Interim Financial Information
The
accompanying interim consolidated balance sheet as of June 30, 2020, consolidated interim statements of operations and stockholders’
equity for the three and six months ended June 30, 2020 and 2019, and consolidated statements of cash flows for the six months
ended June 30, 2020 and 2019 are unaudited. The interim unaudited consolidated financial statements have been prepared in accordance
with GAAP on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect
all adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2020, its consolidated
results of operations and consolidated stockholders’ equity for the three and six month periods ended June 30, 2020 and 2019
and consolidated statements of cash flows for the six month periods ended June 30, 2020 and 2019. The financial data and other
information disclosed in these notes related to the three and six-month periods ended June 30, 2020 and 2019 are unaudited. The
results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year
ending December 31, 2020, any other interim periods or any future year or period.
2.
Summary of Significant Accounting Policies and Recently Issued Accounting Pronouncements
Summary of Significant Accounting Policies
The
accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the
consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on
Form 10-K.
SBIR
Award
On
March 28, 2018, the Company was awarded a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy
National Institute of Child Health and Human Development (NICHD) of the National Institutes of Health to support testing of pediatric
Cellspan Esophageal Implants. The award for Phase I, which was earned over the nine months ended September 30, 2018, provided for
the reimbursement for up to approximately $0.2 million of qualified research and development costs.
On
October 26, 2018, the Company was awarded Phase II of the SBIR grant totaling $1.1 million to support expenses for development,
testing, and translation to the clinic through September 2019. As of September 30, 2019, the Company had expended $0.6 million
of the $1.1 million awarded, and in December 2019 submitted a modified Phase II grant development plan totaling $1.0 million, including
$0.5 million unspent from the Phase 2 grant awarded and an additional $0.5 million for the next year of the project, subject to
the NICHD approval. This modified development plan was approved by the NICHD on August 3, 2020. See Note 11. The SBIR grant has
the potential to provide a total award of approximately $1.8 million, of which approximately $0.8 million has been recognized to
date. The Company did not recognize grant income from Phase II of the SBIR grant for the three and six months ended June 30, 2020.
Grant
income is recognized when qualified research and development costs are incurred and recorded in other income (expense), net in
the consolidated statements of operations. When evaluating grant revenue from the SBIR grant, the Company considered accounting
requirements under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606, Revenue
From Contracts With Customers. The Company concluded that ASC 606 did not apply as there is no exchange of goods or services
or an exchange of intellectual property between the parties; therefore, the Company presents grant income in other income.
Restricted Cash
Restricted
cash consists of $50,000 held as collateral for the Company’s credit card program as of June 30, 2020 and December
31, 2019. The Company’s consolidated statements of cash flows include restricted cash with cash when reconciling the beginning-of-period
and end-of-period total amounts shown on such statements.
A reconciliation of the cash and restricted cash reported within
the balance sheet that sum to the total of the same amounts shown in the consolidated statements of cash flows is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
618
|
|
|
$
|
913
|
|
Restricted cash
|
|
|
50
|
|
|
|
50
|
|
Total cash and restricted cash as shown in the consolidated statements of cash flows
|
|
$
|
668
|
|
|
$
|
963
|
|
Recently Adopted Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to
the Disclosure Requirement for Fair Value Measurement. This ASU removes, modifies and adds certain disclosure requirements
of ASC Topic 820. The Company adopted this ASU effective January 1, 2020 as required and its adoption did not have a material impact
on the Company’s consolidated financial statements for the reporting period.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the Company’s consolidated financial statements
upon adoption.
3. Capital Stock
During
the six months ended June 30, 2020, the Company issued a total of 151,027 shares of its common stock at a purchase price
of $3.70 per share and warrants to purchase 151,027 shares of common stock at an exercise price of $3.70 per share to a group of
investors for aggregate gross and net proceeds of approximately $0.6 million, of which $0.5 million and $0.1 million was allocated
to the common stock and warrants, respectively. The Company classified these warrants on its consolidated balance sheets as equity
as the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company, and
valued using the Black-Scholes model based on the following weighted average assumptions:
Risk-free
interest rate
|
|
|
0.88
|
%
|
Expected
volatility
|
|
|
106.7
|
%
|
Expected
term
|
|
|
2
|
months
|
Expected
dividend yield
|
|
|
-
|
|
Exercise
price
|
|
$
|
3.70
|
|
Market
value of common stock
|
|
$
|
3.11
|
|
During
the six months ended June 30, 2020, the Company issued 141,533 shares of its common stock to a group of investors in connection
with the exercise of 141,533 previously issued warrants at $3.70 per share for aggregate gross and net proceeds of approximately
$0.5 million.
During
the six months ended June 30, 2020, the Company issued 214,000 shares of its common stock to a group of investors in connection
with the exercise of 214,000 previously issued warrants at $2.00 per share for aggregate gross and net proceeds of approximately
$0.4 million.
During
the six months ended June 30, 2020, the Company issued a total of 25,948 shares of its common stock to employees due to
the vesting of restricted stock units and issuance of a common stock award.
Warrant
to purchase common stock activity for the six months ended June 30, 2020 was as follows:
|
|
Amount
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at December 31, 2019
|
|
|
2,673,051
|
|
|
$
|
5.38
|
|
Issued
|
|
|
151,027
|
|
|
|
3.70
|
|
Exercised
|
|
|
(355,553
|
)
|
|
|
2.68
|
|
Outstanding at June 30, 2020
|
|
|
2,468,525
|
|
|
$
|
5.66
|
|
4.
Notes Payable
On May 4, 2020, the Company obtained a loan (Loan) from the
Bank of America (Lender) in the aggregate amount of $404,221, pursuant to the PPP, established as part of the CARES Act. The Loan
is evidenced by a promissory note dated May 4, 2020 issued by the Company and will accrue interest at a fixed interest rate of
1% per annum from the funding date of May 4, 2020. Payments of principal and interest are deferred for the first six months
following funding under the original terms of the promissory note.
Under the terms of the PPP, certain amounts of the Loan may
be forgiven if they are used for qualifying expenses as described in the CARES Act. The terms of the promissory note, including
eligibility and forgiveness, may be subject to additional requirements adopted by the SBA. Any unforgiven portion of the PPP loan,
including principal and interest, will mature on May 4, 2022 and will be payable monthly commencing on November 4, 2020. The Note
may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
On June 5, 2020, the PPP Flexibility Act was signed into law,
providing companies with the option to extend the loan forgiveness period from 8 weeks to 24 weeks after loan origination, a reduction
of the required amount of payroll expenditures from 75% to 60%, and the removal of payroll tax deferrals upon loan forgiveness.
The PPP Flexibility Act also provides the lender the right to extend the maturity date of the promissory note from two years to
five years.
The Company has recorded the borrowings under the Loan in the
accompanying balance sheet based on the terms of the Loan, using a two-year repayment schedule, commencing November 4, 2020. In
the event the Loan is amended to provide for a five year repayment schedule or certain of the amounts are forgiven, each of which
are at the sole discretion of the Lender, the Company will account for the change in terms in the period in which the events occur.
There is no assurance that the term of the Loan will be extended or any portion of the Loan will be forgiven.
The Company has accounted for the loan under FASB ASC 470,
Debt. Repayment amounts due within 1 year have been recorded as current liabilities, and the remaining amounts due in more
than 1 year as long-term liabilities. If the Company is successful in receiving forgiveness for any portion of the loan used for
qualifying expenses, those amounts will be recorded as a gain upon extinguishment.
5.
Fair Value Measurements
Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
The
Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value that prioritizes
the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair
value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input
that is significant to the fair value measurement.
The
Company had no assets or liabilities classified as Level 2 as of June 30, 2020 and December 31, 2019. The Company’s
restricted cash that serves as collateral for the Company’s credit card program is held in a demand money market account
and is measured at fair value based on quoted prices, which are Level 1 inputs. The Company classifies warrants to purchase common
stock that are accounted for as liabilities as Level 3 liabilities, as discussed below.
The Company's notes payable carrying value at June 30, 2020
approximates fair value due to the relatively small amount of principal and the short duration of the note payable. The Company
had no notes payable at December 31, 2019. See Note 4.
The
following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured
at fair value on a recurring basis as of June 30, 2020:
|
|
Fair Value Measurement as of June 30, 2020
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
55
|
|
|
$
|
55
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
55
|
|
|
$
|
55
|
|
The
following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured
at fair value on a recurring basis as of December 31, 2019:
|
|
Fair Value Measurement as of December 31, 2019
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
33
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
33
|
|
The
following table presents a reconciliation of the Company’s liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the six months ended June 30, 2020:
|
|
Warrant Liability
|
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2019
|
|
$
|
33
|
|
Change in fair value upon re-measurement
|
|
|
22
|
|
Balance at June 30, 2020
|
|
$
|
55
|
|
The
Company has re-measured the warrant liability to estimated fair value at inception, prior to modification and at each reporting
date using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Risk-free interest rate
|
|
|
0.16
|
%
|
|
|
1.58
|
%
|
Expected volatility
|
|
|
108.31
|
%
|
|
|
90.53
|
%
|
Expected term (in years)
|
|
|
1.6
|
|
|
|
2.1
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Exercise price
|
|
$
|
8.00
|
|
|
$
|
8.00
|
|
Market value of common stock
|
|
$
|
2.51
|
|
|
$
|
2.01
|
|
Warrants to purchase shares of common stock
|
|
|
92,212
|
|
|
|
92,212
|
|
6. Share-Based Compensation
Biostage
Amended and Restated Equity Incentive Plan
The
Company maintains the Amended and Restated Equity Incentive Plan (the Plan) for the benefit of certain officers, employees,
non-employee directors, and other key persons (including consultants and advisory board members). All options and awards granted
under the Plan consist of the Company’s shares of common stock. The Company’s policy is to issue stock available from
its registered but unissued stock pool through its transfer agent to satisfy stock option exercises and vesting of the restricted
stock units. The vesting period for awards is generally four years and the contractual life is ten years. Canceled and forfeited
options and awards are available to be reissued under the Plan.
In June 2020, the Company’s shareholders approved the
Amended and Restated Equity Incentive Plan, to among other things, increase of the number of shares of the Company’s common
stock available for issuance pursuant to the 2013 Equity Incentive Plan by 3,000,000 shares, which increased the total shares authorized
to be issued under the Plan to 5,098,000. There are 3,329,430 shares available for issuance as of June 30, 2020.
The
Company has granted options to purchase common stock and restricted stock units (RSUs) under the Plan. Stock option and
restricted stock unit activity during the six months ended June 30, 2020 was as follows:
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
Amount
|
|
|
Weighted –
Average
Exercise Price
|
|
|
Amount
|
|
|
Weighted –
Average
Grant Date
Fair Value
|
|
Outstanding at December 31, 2019
|
|
|
1,772,761
|
|
|
$
|
6.04
|
|
|
|
3,300
|
|
|
$
|
7.68
|
|
Granted
|
|
|
275,337
|
|
|
|
2.87
|
|
|
|
-
|
|
|
|
-
|
|
Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,300
|
)
|
|
|
7.68
|
|
Canceled
|
|
|
(343,377
|
)
|
|
|
2.70
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2020
|
|
|
1,704,721
|
|
|
$
|
6.20
|
|
|
|
-
|
|
|
$
|
-
|
|
The
Company’s outstanding stock options include 338,663 performance-based awards that have vesting provisions subject
to the achievement of certain business milestones. In September 2019, the Company deemed the achievement of one of the performance-based
milestones totaling 95,131 shares probable for accounting purposes, are now exercisable, and recognized approximately $0.3 million
of expense associated with this milestone during the year ended December 31, 2019. Total unrecognized compensation expense for
the remaining 243,532 performance-based awards is approximately $0.8 million. No expense has been recognized for these unvested
awards as of June 30, 2020 given that the milestone achievements for these awards have not yet been deemed probable for accounting
purposes.
Aggregate
intrinsic value for outstanding options and exercisable options for the year ended June 30, 2020 was approximately $43,000
based on the Company’s closing stock price of $2.51 per share as of June 30, 2020. As of June 30, 2020, unrecognized compensation
cost related to unvested nonperformance-based awards amounted to $0.8 million, which will be recognized over a weighted average
period of 0.8 years.
The
Company uses the Black-Scholes option pricing model to value its stock options. The weighted average assumptions for valuing
options granted during the six months ended June 30, 2020 were as follows:
Risk-free interest rate
|
|
|
0.71
|
%
|
Expected volatility
|
|
|
109.7
|
%
|
Expected term
|
|
|
4.2
|
years
|
Expected dividend yield
|
|
|
n/a
|
|
In
February 2020, as part of the termination arrangement with the Company’s former chief executive officer, the Company
modified certain options to purchase 236,970 shares of common stock, issued an 80,000 fully vested stock option grant, and accelerated
the vesting of 3,300 restricted stock units resulting in recording $153,000, $70,000, and $4,000, respectively, of share-based
compensation.
In March 2020, the Company issued 35,000 common stock awards
to an employee to be earned upon the achievement of certain milestones. Such milestones were achieved as of June 30, 2020 and the
Company issued 23,793 fully vested share of common stock to the employee with 11,207 common shares withheld to cover taxes. The
Company recognized share-based compensation of $65,200 and $140,000 for the three and six months ended June 30, 2020, respectively.
The
Company recorded share-based compensation expense in the following expense categories of its consolidated statements of
operations:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
69
|
|
|
$
|
81
|
|
|
$
|
161
|
|
|
$
|
153
|
|
General and administrative
|
|
|
196
|
|
|
|
450
|
|
|
|
692
|
|
|
|
671
|
|
Total share-based compensation
|
|
$
|
265
|
|
|
$
|
531
|
|
|
$
|
853
|
|
|
$
|
824
|
|
The
Company estimates the fair value of non-employee share options using the Black-Scholes option pricing model reflecting the
same assumptions as applied to employee and director options in each of the reporting periods, other than the expected life, which
is assumed to be the remaining contractual life of the options.
7. Commitments and Contingencies
First Pecos Breach Notice
In
June 2017, the Company entered into a binding Memorandum of Understanding with First Pecos, LLC (First Pecos), pursuant
to which the Company agreed to issue to First Pecos in a private placement 485,000 shares of its common stock on a post-reverse
split basis at a purchase price of $6.30 per share or, to the extent First Pecos, following the transaction, would own more than
19.9% of the Company’s common stock, shares of a new class of preferred stock of the Company with a per-share purchase price
of $1,000.
In
October 2017, as a result of the First Pecos failure to deliver the Purchase Price to the Company following satisfaction
of all closing conditions in the Purchase Agreement, the Company delivered a notice to First Pecos and its manager, Leon “Chip”
Greenblatt III, stating that First Pecos was in breach of the Purchase Agreement. None of the shares of common stock, shares of
preferred stock or warrants were issued to First Pecos. Also in October 2017, First Pecos delivered a notice to the Company stating
that, as a result of alleged breaches by the Company of its obligations pursuant to the Purchase Agreement, First Pecos terminated
the Purchase Agreement and demanded that the Company pay a $500,000 termination fee pursuant to the terms of the Purchase Agreement.
The
Company believes that it was not in breach of the Purchase Agreement at any time, and that the First Pecos notice was unjustified
and without any legal merit or factual basis. Accordingly, the Company believes that First Pecos was not entitled to terminate
the Purchase Agreement, and was not entitled to any termination fee thereunder, as the failure to consummate the Pecos Placement
resulted from the First Pecos breach of the Purchase Agreement. The Company has not accrued for this liability as the Company believes
the claim to be without merit.
Other
On April 14, 2017, representatives for the estate of a deceased
individual filed a civil lawsuit in the Suffolk Superior Court, in Boston, Massachusetts, against the Company and Harvard Bioscience.
The complaint alleges that the decedent’s injury and death were caused by two tracheal implants that incorporated synthetic
trachea scaffolds and a biologic component combined by the implanting surgeon with a bioreactor, and surgically implanted in the
decedent in two surgeries performed in 2012 and 2013. The civil complaint seeks a non-specific sum of money to compensate the plaintiffs.
This civil lawsuit relates to the Company’s first-generation trachea scaffold technology for which the Company discontinued
development in 2014, and not to the Company’s current Cellspan technology nor to its lead development product candidate,
the Cellspan Esophageal Implant. The Company intends to vigorously defend this case. While the Company believes that such claim
lacks merit, the Company is unable to predict the ultimate outcome of such litigation. In accordance with a separation and distribution
agreement between Harvard Bioscience and the Company relating to the spin-off, the Company would be required to indemnify Harvard
Bioscience against losses that Harvard Bioscience may suffer as a result of this litigation. The Company has been informed by its
insurance provider that the case has been accepted as an insurable claim under the Company’s product liability insurance
policy. The Company does not believe a loss is probable at this time and therefore has not accrued any amounts for this contingent
liability.
From
time to time, the Company may be involved in various claims and legal proceedings arising in the ordinary course of business.
Other than the above matter, there are no such matters pending that the Company expects to be material in relation to its business,
financial condition, results of operations, or cash flows.
8. Leases
The
Company leases laboratory and office space and certain equipment with remaining terms ranging approximately from 1 year
to 4.5 years.
The
laboratory and office space arrangement is under a sublease that was renewed in December of 2019 and currently extends through
May 31, 2021. This lease automatically renews annually for a one-year period unless the Company or the counterparty provides
a notice of termination within one hundred and eighty days prior to May 31 of each year.
All
of the Company’s leases qualify as operating leases. The following table summarizes the presentation of the Company’s
operating leases in its consolidated balance sheets:
(In thousands)
|
|
Balance Sheet Classification
|
|
At
June 30, 2020
|
|
Assets:
|
|
|
|
|
|
|
Operating lease assets
|
|
Right-of-use asset
|
|
$
|
141
|
|
Liabilities:
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
Current portion of operating lease liabilities
|
|
$
|
100
|
|
Non-current operating lease liabilities
|
|
Operating lease liabilities, net of current portion
|
|
|
41
|
|
Total operating lease liabilities
|
|
|
|
$
|
141
|
|
The Company
recorded operating lease expense in the following categories in its consolidated statements of operations:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
19
|
|
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
36
|
|
General and administrative
|
|
|
11
|
|
|
|
10
|
|
|
|
39
|
|
|
|
20
|
|
Total operating lease expense
|
|
$
|
30
|
|
|
$
|
28
|
|
|
$
|
61
|
|
|
$
|
56
|
|
The minimum lease payments for the next five years are expected
to be as follows:
(In thousands)
|
|
As Of
June 30, 2020
|
|
2020
|
|
$
|
61
|
|
2021
|
|
|
62
|
|
2022
|
|
|
19
|
|
2023
|
|
|
12
|
|
2024
|
|
|
7
|
|
Total lease payments
|
|
$
|
161
|
|
Less: imputed interest
|
|
|
20
|
|
Present value of operating lease liabilities
|
|
$
|
141
|
|
Cash
paid included in the computation of the right of use asset and lease liability during the six months ended June 30, 2020
and 2019 amounted to approximately $61,000 and $56,000, respectively.
The
weighted average remaining lease term and weighted average discount rate of the Company’s operating leases are as
follows:
|
|
As Of
June 30, 2020
|
|
Weighted average remaining lease term (in years)
|
|
|
2.07
|
|
Weighted average discount rate
|
|
|
13.13
|
%
|
9. Net Loss Per Share
The
following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders
for the six months ended June 30, 2020 and 2019 because including them would have had an anti-dilutive effect:
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants to purchase common stock
|
|
|
2,468,525
|
|
|
|
3,523,821
|
|
Options to purchase common stock
|
|
|
1,704,721
|
|
|
|
1,627,811
|
|
Unvested restricted common stock units
|
|
|
-
|
|
|
|
3,300
|
|
Total
|
|
|
4,173,246
|
|
|
|
5,154,932
|
|
10. Income Taxes
The
Company did not provide for any income taxes in its consolidated statements of operations for the three and six months ended
June 30, 2020 and 2019. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because,
at June 30, 2020 and December 31, 2019, it was more likely than not that any future benefit from deductible temporary differences
and net operating loss and tax credit carryforwards would not be realized.
The
Company has not recorded any amounts for unrecognized tax benefits as of June 30, 2020 or December 31, 2019. As of
June 30, 2020 and December 31, 2019, the Company had no accrued interest or tax penalties recorded related to income taxes.
The Company is subject to U.S. federal income tax and Massachusetts state income tax. The statute of limitations for assessment
by the IRS and state tax authorities is open for all periods from inception through December 31, 2018; currently, no federal or
state income tax returns are under examination by the respective taxing authorities.
Under
the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and
possible adjustment by the IRS and state tax authorities. Net operating loss and tax credit carryforwards may become subject to
an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year
period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar
state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership
change. Subsequent ownership changes may further affect the limitation in future years. The Company has recently completed several
equity financing transactions which have either individually or cumulatively resulted in a change in control as defined by Sections
382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. The Company does not believe the
impact of any limitation on the use of its net operating loss or credit carryforwards will have a material impact on the Company’s
consolidated financial statements since the Company has a full valuation allowance against its deferred tax assets due to the uncertainty
regarding future taxable income for the foreseeable future.
For
all periods through June 30, 2020, the Company generated research credits but has not conducted a study to document the
qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards;
however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A
full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is
required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development
credit carryforwards and the valuation allowance.
Coronavirus Aid, Relief and Economic Security Act
In
response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction
limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback federal and
state net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under
the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize
NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50%
of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1,
2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount
of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax
Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement
property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result
in any material adjustments to the Company’s income tax provision for the three and six months ended June
30, 2020, or to the Company’s net deferred tax assets as of June 30, 2020.
11. Subsequent Events
Equity Transactions
Subsequent
to end of the quarter ended June 30, 2020, the Company issued 58,932 shares of its common stock to a group of investors in connection
with the exercise of 58,932 previously issued warrants at $3.70 per share for aggregate gross and net proceeds of approximately
$0.2 million. See Note 1.
SBIR Award
On
August 3, 2020, the Company was awarded the second year of a Phase II Fast-Track SBIR grant from the Eunice Kennedy NICHD
totaling $0.5 million for support of development, testing, and translation to the clinic covering qualified expenses incurred from
October 1, 2019 through September 30, 2020. The Company is evaluating the impact of this grant award. See Note 2.
The
Company has performed an evaluation of subsequent events through the time of filing this Quarterly Report on Form 10-Q with
the Securities Exchange Commission and has determined that there are no such events to report other than those disclosed above.